There are many who see ‘the relationship’ and ‘the contract’ as independent elements – and indeed, who perceive the contract as potentially damaging to the relationship.
As I work with companies around the world, I am increasingly discovering that this is often far from the truth, especially in the case of larger corporations. An example arose in a conversation that I had yesterday with a former senior supply chain executive with one of the world’s best known brands, whose ‘no contract, just a handshake’ approach has been taken to indicate strong and collaborative relationships.
According to this executive, the ‘no contract’ approach applied only to the top-tier suppliers with a ‘strategic relationship’. These were indeed closed ‘with a handshake’. Other transactional suppliers always had a contract of some sort – e.g. a purchase order.
However, behind the scenes, the appearance of ‘collaboration’ masked the fact that the corporation in question was using the lack of contract as a lever to pressure its suppliers. In fact, in recent years, the top tier suppliers started to ask for contracts to protect themselves from what they saw as ‘abusive behavior’. According to this former executive, the reason for the no-contracts approach was not because of a close, collaborative relationship, but was actually because the customer didn’t want to be committed. They used this lack of commitment to threaten the suppliers with discontinuance if they did not meet requirements. This way, they pushed suppliers to take low prices or to bear the risks of entering new markets. It was made clear to top-tier suppliers that ‘they were accountable for growth’.
Driven by these approaches – and the very low margins that resulted – there was substantial market consolidation, so over time the power balance shifted and suppliers were no longer prepared to accept the one-sided relationship. They insisted on having contracts. This need for contracts was actually becoming mutual because of issues such as regulatory compliance, which required far more discipline.
Within the customer organization itself, I am told that the handshake system contributed to a culture of limited executive accountability. Since handshake agreements depended on personal relationships, they often eroded – damaging performance, trust and sustainability. When things went wrong, executives were able to deny accountability since there was no written record, no set of commitments, no signatures.
The story is fascinating because it shows the very real risks of short-term, cost-based behavior based on market power. It is tempting for top management to use such power in its supply management strategies, but as this example shows, such an approach cannot be sustained. Rather like the automotive industry, which for many years exhibited similar aggressive tactics, it will take a long time to restore trust and, in the meantime, corporate performance will suffer.
Once again, we see the important role that contracts should play in ensuring an ethical framework to a relationship and establishing ‘the rules of play’. Rather than seeing no contract as a good thing, perhaps it should raise our suspicions about the true intent of our counter-party.
When it comes to winning business, are contract managers a liability or an asset?
Interview any group of sales people and you will receive mixed answers. For some, contract managers are a key area of support, facilitating internal reviews and ensuring the production or negotiation of a timely and appropriate agreement. For others, they are a source of problems, an obstacle to be avoided.
These divergent views reflect differences in approach, personality, skills, process and organizational culture. But what about the customer view? In general, do they prefer doing business with companies that have invested in contract managers?
In recent days, staff at IACCM have spoken with a number of large corporations about their experiences working with major providers of outsourcing and IT services. They appear to have little doubt about their preference – and they increasingly see organizations which lack trained contract management staff as unreliable and unprofessional.
One major financial services company made the point that it isn’t just about having people with the contract management job title – it is also about having them working with a consistent role and professional skills. In this context, they cited the value they have observed in personnel that undertook IACCM training and certification. Several went further and mentioned how helpful it is when the contract managers from both organizations have completed the IACCM programs because that creates a common understanding of approach and generally yields a far more positive outcome.
This should come as no surprise. Professions generally do not distinguish between personnel who work in customer versus supplier organizations. One reason that lawyers or finance professionals are often able to reach speedy resolution is because they speak the same language and had similar core training and education. It seems obvious that having buy side and sell side staff operating with a common body of knowledge will accelerate the speed and quality of contract closure and performance. But several of these interviews went further because they cited examples of companies that are making no investment in their development of a contract management function – and how increasingly they are starting to avoid doing business with such companies ‘because they can’t be trusted’.
So the message seems to be, if you want to win in the market, adopt a certified Contract Manager!
It’s not uncommon for business functions to lay claim to ownership or proficiency in another domain – but that doesn’t make it right.
In the case of contract management, the procurement, legal and project management functions are among those who assert it is ‘theirs’, that it is in some way a sub-set of what they do. That is, they make that claim until things go wrong – at which point it conveniently becomes someone else’s fault.
i am making these observations because people frequently question whether contract management is a discipline in its own right. They do not immediately register its importance for each party in a trading relationship, its role in ensuring benefits are realised and obligations are fulfilled. Quite obviously, it is not about Procurement – it is about establishing an effective relationship under the right terms and then overseeing their performance – and that requires a contract manager within the customer and a contract manager within the supplier.
it is of course quite possible that this contract management role can be a sub-set of another job – such delegation occurs in many areas of business organization. The problem comes when those with a delegated authority fail to realise the limits of their knowledge and expertise.
It is attitudes and behaviours like this that cause so many contracts to go wrong or to under-perform. No one has ever prevented any of these functions building proficiency – indeed, I have personally made many efforts to rouse their interest. The fact is, contract management is not core to their perceived purpose or expertise. They mostly want to own it, rather than actually do it – because in reality, contract management today is a complicated field, requiring the sort of skills and knowledge that is not taught in the law, supply management or project management syllabus. And that is why contract management has become a discipline in its own right, with its own body of knowledge, tools and methods.
I am not suggesting that practitioners in law, procurement or project management know nothing about contract management, nor that they should have no role in it. They should simply appreciate that just because they know something about the subject does not make them an expert – any more than a contract manager (who is trained in aspects of their role) is expert in their disciplines.
Contract management aggregates across many specialist fields and interests and, in a sense, is a servant to all of them. One reason it is being claimed by these different groups is because, unlike many of them, it is less threatened by new technologies and job losses. It will therefore continue to be an attractive career path in its own right – and not simply a sub-set of another discipline.
For anyone wanting to pursue this path, IACCM offers a globally recognized portfolio of training programs and certification, backed up by extensive research and continuing professional development programs. They are available worldwide.
Category management is now a widespread approach within supply management. For some, it is about aggregation of spend and achieving lower prices. For others, it is about increasing the expertise and value delivered by their procurement function. As with so many initiatives, it is often hard to tell what precise benefits have resulted.
One concern that is often expressed is whether a category approach limits perspectives and creates a narrow focus. In this context, I was interested in a conversation today with a team from a company called New Information Paradigms (NIP). One of their projects contained the term ‘category leadership’, which they defined as ‘aligning capabilities through relationship assets’. The project had involved collaboration across a portfolio of suppliers, in which they had worked together to identify efficiencies and deliver savings to their customer. For example, they explored opportunities to align transportation and warehousing – even, in a few instances, to switch product lines.
The NIP approach had caused organizations to explore their relationship as a potential asset and to examine their mutual partnering capabilities. It led to key questions, such as:
- are we both prepared to adjust the way we do business to better align processes?
- how well do we share and manage information as a joint resource?
- how well do we understand relationship risks?
- how well are we leveraging the relationship asset to do business in a new way, to innovate and to protect or grow mutual value?
It strikes me that there is a further step in this approach – and that is to achieve ‘category integration’, where there are specific initiatives to develop collaboration across inter-dependent supply networks and to establish opportunities to optimize performance. We see this to some extent in approaches to relational contracting, where facilitated workshops establish common procedures, discuss relationship risks and generate a shared commitment to continuous improvement.
My belief is that category management in isolation delivers limited benefits. As with any segmentation, it needs approaches that offer incentives for integration and cooperation.
What will contracting look like 5 years from now? What role will it play in the business?
IACCM is currently updating its studies on ‘The Future of Contracting’ through a series of interviews and web-based surveys. Already, there are hundreds of participants contributing their thoughts and ideas.
The topic is important. Almost every day, in every world region, the media discusses how jobs are changing. In the US last week, there were forecasts that about 80 million of today’s jobs would disappear over the next 10 – 15 years. In the UK, the forecast is 15 million. Unless we adapt our skills and think differently about the application of our knowledge, many of us risk being part of that number.
It is technology driving the changes in employment – and indeed, almost 90% of survey participants recognize the major impact it will have on the field of contracting. Many appreciate that this represents an opportunity to do things differently and to generate far more of the data and analysis that raises the value of our contribution. But they seem also to understand that our work will assume a different context. Certainly, a large majority reject the focus on compliance and see our emerging world requiring far more collaboration and agility, a shared commitment to delivering results.
To achieve these value-based outcomes, the contracting community (both buy and sell) appreciates the need to integrate ‘the contract’ and ‘the relationship’ into a more singular and consistent approach. They also expect the adoption of performance-based contracts, established through collaborative negotiations.
What are your views? Share your ideas by contributing to our survey. The final results will be shared with all participants, with the published report due in January 2016.
” All large IT organizations now need to consume services from an increasing array of Service Providers to remain competitive and keep up with the rate of change in the industry. This means that IT organizations are now required to integrate and orchestrate services provided by others, as much as deliver the services themselves. This requires organizations to change; change their processes, their skills and their culture.”
This extract describes a new book that outlines the changes needed in today’s delivery of IT. It is targeted at project managers, service delivery managers, IT professionals – and it covers critical aspects of contract development, contract management and relationship management. The authors have identified the point that this new world of service provider interdependence requires “collaborative working relationship between organizations and their Service Providers to maximize the benefit of multi-sourcing” and addresses the mechanisms that “govern and manage the linkage of services, the technology of which they are comprised and the delivery organizations and processes used to operate them, into an operating model.”
Oh, you might say “That clearly reflects the role that Procurement and Contract Management will fulfill”. But you would be wrong, because the authors clearly see no particular role for these functions. Indeed, they reflect more the findings of a recent survey that discovered 78% of CIOs see Procurement as ‘a hindrance’.
I know that some contracts, legal and procurement professionals are rising to the needs and challenges of a fast-changing world in which traditional thinking about the role of contracts and the management of risks must alter quite dramatically. But studies such as IACCM’s ‘Top Negotiated Terms’ show that old habits are hard to eliminate and far too many contracts remain focused on battles over transactional risk allocation. More importantly, staff in contracts, legal and procurement are not acting as champions of change – and that is what ultimately makes them of limited relevance to CIOs and other business executives who depend on contracts to achieve their business goals.
As this new book on Service Integration and Management clearly shows, if we do not step up to providing the changed ‘processes, skills and culture’ that our interconnected world demands, others will simply step into the gap … and we will be victims of the change.
$2.6 billion over budget, 7 years late in delivery … and that’s just the revised estimate. If only the Department of Homeland Security and the IBM Corporation had studied IACCM’s guidance on ‘the 10 pitfalls of contract management’ before they embarked on their project to automate major elements of the US immigration process.
Once again, we have the story of a technology project going badly awry. From initial cost estimates of $500 million and a completion date of 2013, the current projections have now climbed to $3.1 billion and delivery around 2020.
Reports in the Washington Post (November 9th, 2015) associate the problem directly with two of the IACCM top causes of value loss – failure to agree scope and goals and failure to employ the right form of contract. One can only assume that other principles of good contracting were also breached – for example, the quality of transition and on-going contract performance management must have been lacking for such a large problem to have remained hidden for so long.
Perhaps the only way to avoid these costly blunders is to convert the 10 Pitfalls into the 10 Commandments of Contract Management and to require obligatory sign-off of each element by the responsible contract owner in both buyer and supplier before they can proceed. It is otherwise remarkable that we see so many projects push ahead without clarity over goals or how they will be achieved or what governance and performance process is in place. I am sure there are many excuses – political pressure, the need to secure or retain funds, the good intentions of the parties to get started and sort it out later, the confidence of DHS in their supplier …. The thing is, we have seen and heard this so many times before and there are ways these pressures can be handled without jeopardizing success.
Good contract management is very cheap compared with losses and reputational damage on this scale.